Crypto Investment Basics: A Beginner's Guide To Getting Started

Cryptocurrency is a digital currency that can be used to buy goods and services or traded for a profit. Bitcoin is the most widely used cryptocurrency. It is a risky investment due to its volatile nature, but it can be a rewarding opportunity for those who are willing to take on the risk. Before investing, it is important to understand the basics of cryptocurrency, the different types available, and the various investment options. You can buy cryptocurrency directly through an exchange or broker, or invest in crypto funds, companies, or a Roth IRA. It is recommended to only invest what you can afford to lose and to diversify your portfolio to manage risk.

Understand the risks and volatility of crypto

Volatility Explained

Volatility refers to how much the price of an asset has increased or decreased over a given period. The more volatile an asset, the higher the risk of investing in it. Crypto is considered one of the most volatile asset classes, with frequent and significant price swings.

There are several factors that contribute to the volatility of cryptocurrencies:

• New and Unstable Market: Crypto is a relatively new asset class, and the market is still in a phase of high growth and price discovery. As the market matures, volatility is likely to decrease.
• Immature and Unregulated: The lack of comprehensive regulation in the crypto market means there are no circuit breakers to dampen volatility caused by panic selling or external events. This also makes the market more susceptible to the spread of investor sentiment, such as FOMO (Fear of Missing Out).
• Speculation and News Events: Speculation and news events, such as COVID-19, can drive price swings in crypto, often with an exaggerated impact due to the market's immature nature.
• Supply and Demand Dynamics: The limited supply of certain crypto assets, such as Bitcoin, can lead to increased price volatility when there is sudden or increased demand.
• Market Size and Liquidity: The crypto market is relatively small compared to traditional markets, with lower liquidity and depth. This makes it more difficult for large traders to enter or exit the market without significantly affecting prices.
• Investor Sentiment: The crypto market is heavily influenced by investor sentiment, which can spread quickly due to the immaturity of the market and the psychology of the typical crypto investor, who is often an individual or retail investor.

Managing Risk in Crypto Investing

When investing in highly volatile assets like crypto, it is important to understand and manage your risk. Here are some key considerations:

• Long-term Perspective: Take a long-term perspective when investing in crypto. Avoid making emotional decisions, such as buying when the price is rising or selling when prices go down.
• Diversification: Diversify your investments across different crypto assets to reduce the impact of price swings in any single asset.
• Don't Invest More Than You Can Afford to Lose: Only invest an amount you are comfortable losing. Crypto is a risky and speculative investment, and there is a possibility of losing your entire investment.
• Research and Due Diligence: Thoroughly research and vet any crypto investments to avoid scams and fraudulent schemes. Understand the unique characteristics and risks of each cryptocurrency before investing.
• Secure Your Investments: Use reputable exchanges and digital wallet providers, strong passwords, two-factor verification, and secure internet connections to protect your crypto investments from hacking and phishing scams.

Choose a reputable exchange

When choosing a cryptocurrency exchange, it is important to select a reputable, well-known platform with a large selection of currencies. Coinbase, Binance, and Kraken are some of the most popular and well-established exchanges. These platforms offer a wide range of cryptocurrencies and tend to be competitive in terms of pricing. It is also essential to consider security, fees, trading volume, minimum investment requirements, and the types of cryptocurrency available on a given exchange.

Before opening an account, you will need to provide personal information and verify your identity. Setting up strong passwords, enabling two-factor authentication, and using secure internet connections are crucial steps to protect your account.

Additionally, it is worth noting that some exchanges allow you to store your cryptocurrency directly on their platform. These exchanges are regulated and have robust security measures to protect your assets from hackers and online threats. They also carry financial insurance, providing an extra layer of protection for your investments.

If you prefer not to use an exchange for long-term storage, you can opt for a crypto wallet. Crypto wallets can be "hot" or "cold". A hot wallet is accessible via the internet and offers convenience, while a cold wallet is a physical storage device, similar to a USB drive, that keeps your cryptocurrency keys completely offline, providing enhanced security.

Explore storage options

As a beginner, it's important to understand how to store your cryptocurrency safely. You can't store cryptocurrencies in a regular bank account; they need to be kept in a crypto wallet or on reputable crypto exchanges/apps. Your chosen storage option should be both secure and accessible.

• Crypto exchanges: These are digital marketplaces that allow you to buy, sell, and trade cryptocurrencies. Examples include Coinbase, Binance, and Kraken. While storing your crypto on an exchange is convenient, it also carries risks. Exchanges can be hacked, and your crypto could be stolen. Additionally, some exchanges have been accused of misappropriating client funds.
• Hot wallets: These are online, software-based crypto wallets. They can be custodial, where the exchange holds your private keys, or non-custodial, where you control your private keys. Hot wallets are convenient but vulnerable to cybersecurity threats and hacks. Examples include Guarda and Mycelium.
• Cold wallets: Cold wallets, or cold storage, are offline devices that are not connected to the internet. They are considered more secure than hot wallets since they are not susceptible to online hacks. Examples include Trezor and Ledger.
• Paper wallets: Paper wallets are physical printouts that contain your private keys and wallet address. They are inexpensive but vulnerable to physical damage, theft, or loss.

When choosing a storage option, consider factors such as security, fees, the number of supported cryptocurrencies, ease of use, and recovery options. Diversifying your storage methods across multiple types may be a good idea to reduce the risk of losing everything.

Decide how much to invest

How much you decide to invest in cryptocurrency depends on many factors, such as your budget, risk tolerance, and investment strategy.

Some experts recommend investing no more than 1% to 5% of your net worth in cryptocurrency. It's important to never invest more than you can afford to lose.

If you want to invest in a cryptocurrency with a high value per coin, most exchanges allow you to invest on a dollar basis, rather than buying a whole coin. Focus on the total amount of money you want to invest, rather than the number of coins you want to buy.

As an investor in cryptocurrency, you need to decide how much of your portfolio to allocate to digital assets. A best practice among investors is to periodically review your entire portfolio to assess the need to rebalance your holdings. That might mean increasing or scaling back your crypto exposure, depending on your investment goals and other financial needs.

Stay informed and manage your investments

Staying informed and managing your investments is a crucial aspect of investing in cryptocurrency. Here are some detailed tips to help you stay informed and effectively manage your crypto investments:

• Monitor Market Trends and News: The cryptocurrency market is highly volatile and dynamic, with frequent price swings. Stay updated on market trends, news, and developments that can impact your investments. Follow reliable crypto news sources, analyse price charts, and keep track of market sentiment to make informed decisions.
• Understand Technical and Fundamental Analysis: Technical analysis involves studying price charts, trading volumes, and market data to identify patterns and predict future price movements. Fundamental analysis, on the other hand, focuses on evaluating the intrinsic value of a cryptocurrency by considering factors such as the development team, technology, market adoption, and the health of the blockchain. Combine these approaches to make more informed investment decisions.
• Risk Management: Recognise that crypto investing is risky, and losses can occur. Implement risk management strategies such as setting stop losses, diversifying your portfolio, and only investing what you can afford to lose. Regularly review and assess your risk tolerance and adjust your investments accordingly.
• Stay Informed About Your Chosen Cryptocurrencies: Research and closely follow the cryptocurrencies you have invested in or plan to invest in. Monitor their performance, development updates, community engagement, and any news or events that could impact their value. This will help you make more timely and strategic decisions.
• Long-Term Perspective: Cryptocurrencies are subject to rapid price fluctuations. Avoid making impulsive decisions based on short-term price movements. Adopt a long-term perspective, focusing on the broader trends and the potential for future growth. Remember that crypto investing is a marathon, not a sprint.
• Security and Storage: Prioritise the security of your crypto investments. Utilise secure crypto wallets, enable two-factor authentication, and protect your private keys and passwords. Consider offline storage options, such as hardware wallets, for added security.

Frequently asked questions